Personal Finance

Non-Dull Investments

Property stillremains an attractive investment option for many investors. The property boom of 2004 to 2008 saw a massive increase in the number of buy-to-let properties in the market. However, the subsequent financial crisis brought about a certain moderation of expectations in terms of this asset class. Investors no longer saw it as a guaranteed road to riches. The reality isdepending on a tenant to pay their dues can turn any aspiring property mogul back on his/herinvestment. You see, in South Africa, defaulting tenants are afforded significant protection and it can be many months and an expensive process before a landlord is able to get rid of a non-paying tenant.

You’ve invested in all the “traditional” investment options like: unit trusts; endowments; retirement annuities and life funds! And don’t get us wrong, those are not only good, they’re extremely important.

Property returns are often overstated as many investors tend to overlookthe massive costs associated with property. You hear comments like, “I paid R1 million for the house and sold it for R1.5 million two years later. That is 50% in two years”. The reality is that once you take costs into account, returns are a lot more muted. These costs include bond registration fees, transfer fees, estate agent commissions, bank charges, municipality fees, and general maintenance costs.

There are a number of important factors to consider when investing in a rental property:

Yield: this is calculated as the monthly rental (x12) divided by the purchase price. So a R1 million house that earns R5000 rental per month has a yield of 6% ((5000x12)/1000000). This yield should be compared to yields that can be earned on listed property, bank deposits and government bonds. Always bear in mind though that property yields tend to increase over time as rental escalations kick in.

Location: where is the property situated? Proximity to universities, CBDs and suburban nodes often tend to attract tenants. This is important as it means that the property is unlikely to stand empty for long periods of time. What profile of tenant will it be able to attract?

Physical Assets

Items such as wine, diamonds, art and rugs tend to be marketed as investment assets. A feature of these assets is that they have the potential to increase in value over time, sometimes quite spectacularly so. A well-purchased bottle of wine can easily treble in value over a 5 to 10 year period. Art pieces, by the right artist can experience increases in value of a hundred fold over the long term.

The challenge with these assets, however, is determining their value. There is a huge element of subjectivity involved to this. Unlike a listed company which shows a certain level of profits per share as well as dividends per share, these assets produce neither profits nor income. There is also a significant holding cost that comes with investing in these assets. These include insurance, storage and preservation costs. Wine needs to kept at a constant and controlled temperature, art and diamonds have certain high level security requirements, while rugs need to be packaged and stored in a certain way. All these requirements entail a level of cost.

Another major challenge with all these assets trends to arise when it comes to disposing of them to realise value. A key shortcoming with many of these assets is the non-existence of a well developed market for secondary trading. As a result price discovery becomes quite difficult and therefore, highly subjective. There often are concerns of authenticity, or proving authenticity, when selling which limits the ability of the seller to get their price, and often theintermediation cost can be quite high.

It is important to conduct thorough research when considering making an investment into non-traditional investment options. They are non-traditional because of the lack of liquidity, the high levels of subjectivity and the associated costs that go with investing in them. However, a fine piece of art can be experienced, enjoyed and admired with the hope of making moneymore than a unit trust statement, for example.